Pakistan – (Special Correspondent / Web Desk) – Pakistan is exploring the introduction of digital government bonds, a move that could modernize public debt management. Tokenised bonds offer clear advantages, such as faster settlement, lower risk, easier auditing, and reduced reliance on manual record-keeping. These improvements are particularly valuable given Pakistan’s high system costs and limited market depth.
At its core, a tokenised bond functions like any regular government bond: the state continues to pay interest and return principal on schedule. The difference lies in record-keeping. Ownership is tracked on a blockchain—a decentralized, tamper-proof digital ledger maintained across thousands of computers. Each time a bond changes hands, the blockchain automatically updates the ownership token. This approach does not create a new type of financial claim but provides a more efficient, digital way to record ownership.
However, Pakistan must remain cautious to avoid risks linked to blockchain reliance. While tokenised government bonds are legally separate from cryptocurrencies, they could be indirectly affected by volatility in crypto markets. Unlike traditional bonds, which are largely insulated from bitcoin crashes, tokenised bonds could become exposed if traded on crypto platforms or used as collateral for digital loans. A sudden market shock could trigger cascading effects.
Economic narratives also play a key role. Nobel laureate Robert Shiller notes that stories can spread like contagion, influencing behaviour even more than data. In this case, the public narrative might blur the line between experimental technology and a failing asset. International investors could reassess blockchain-linked holdings, potentially prompting fund managers to liquidate liquid assets quickly. Given their design for easy trading, tokenised bonds could be among the first sold, regardless of Pakistan’s actual ability to meet its debt obligations.
Banks and brokers would also react by raising collateral requirements and tightening risk limits. Investors who borrowed money to buy these bonds would have to sell quickly, causing prices to drop fast. Government announcements could make it worse. If regulators pause the system to ‘review’ it, uncertainty increases. Investors might assume that additional restrictions are forthcoming and sell quickly.
Consider the effects of contagion on the banking system. Pakistani banks hold huge amounts of government debt as ‘Available for Sale’ securities. Under international accounting standards, any decline in the market price of these bonds constitutes a loss. These losses reduce the bank’s capital even if the bank does not sell the bond. This would restrict the banks’ ability to lend and the ensuing uncertainty about the loss exposure of each bank could cause the inter-bank lending market to freeze (shades of what happened in the US financial markets in 2008 come to mind). The entire credit market could come to a screeching halt.
There is also the ‘stablecoin trap’. Most digital asset trades are settled using stablecoins, which are private digital currencies that are pegged to the U.S. dollar. However, stablecoins are not regulated like fiat currencies, and their reserves backing the peg can be opaque. If a crypto crash occurs, investors would flee to stablecoins. However, in a market panic, they would also likely decide to redeem stablecoins for actual dollars.
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If stablecoin issuers must sell their reserves in a fire sale to meet redemptions, they may find that their securities aren’t as liquid as they thought. Besides, fire sales depress prices. The stablecoin, therefore, becomes unstable. If a stablecoin trades below its peg (one dollar), liquidity evaporates.
Pakistani digital tokens would be priced using stablecoins. But if the medium of exchange is no longer worth a dollar, the real price of a bond becomes impossible to figure out, and trading grinds to a halt.
Forced liquidations would accelerate as hedge funds dump Pakistani tokens for whatever they can get. Banks that accepted these tokens as collateral would face a double whammy: tokens plunge in value while the stablecoins used to value them are unreliable. This would trigger massive collateral calls and more selling. There is then the likelihood of a sizable yield gap appearing between traditional bonds and tokenised bonds, with Pakistan’s debt costs soaring.
Note that the nightmare scenario above required only a loss of confidence in settlement instruments, not fraud or sovereign distress.Pakistan should therefore develop a regulatory framework that insulates the legitimate use of blockchain for debt management from the volatility of the crypto-economy.
First, the State Bank of Pakistan (SBP) should mandate a ‘Walled Garden’ infrastructure. Tokenised government bonds should not reside on public, ‘permissionless blockchains’. Instead, they should be issued on a private, ‘permissioned blockchain’ managed by the SBP or a central clearing entity. This prevents the ‘narrative contagion’ by ensuring that Pakistani bonds are physically and digitally separated from speculative crypto assets.
Second, we must avoid the ‘stablecoin trap’ by prohibiting the use of private stablecoins for settlement. Instead, the SBP should introduce a wholesale central bank digital currency (wCBDC). This digital rupee would be a direct liability of the central bank, ensuring that it remains at par with the physical rupee. By using a wCBDC for the settlement of tokenised bonds, we eliminate the risk that a de-pegging of a stablecoin like USDT (Tether) could freeze the bond market.
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Third, collateral eligibility rules must be strictly defined. Regulators should prohibit banks from using tokenised bonds as collateral for any crypto-related borrowing or lending.
Fourth, we need enhanced disclosure and accounting standards. Banks must clearly distinguish between traditional bonds and tokenised bonds in their reporting. The SBP should require ‘stress tests’ specifically designed for digital assets. These tests would ask: ‘What happens to the bank’s capital if the digital settlement layer experiences a 24-hour outage?’ By forcing banks to plan for these technical risks, we ensure they are not caught off guard by hardware or software glitches.
Fifth, bank exposure to tokenised securities should be limited to, say, 15% of capital and require higher risk weights relative to traditional securities. This prevents excessive concentration that could sink individual banks.
Sixth, to prevent concentrated selling pressure, no single non-government entity should hold more than 5% of any tokenised bond issuance.
Seventh, market makers and primary dealers in tokenised securities should be required to maintain rupee liquidity buffers equal to 20% of their token positions. This ensures they can absorb redemptions without forced selling.
Eighth, banks using tokens as collateral must apply a minimum haircut of 25% (100 million tokens count as only 75 million in collateral value) to provide a cushion during periods of price volatility.
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Ninth, retail investor access to tokenised securities should be restricted to amounts below 10% of their net worth. Finally, any platform trading Pakistani tokenised securities must: be licensed by the SECP with minimum capital requirements; segregate customer assets from company assets (no commingling of customer funds with operational balances); maintain proof-of-reserves with real-time auditing; submit to SBP oversight for Anti Money Laundering (AML)/Combating the Financing of Terrorism (CFT) compliance; and prohibit lending customer assets without explicit consent and disclosure.
Cryptocurrency volatility is inherent and inevitable. The guardrails we build today determine whether blockchain strengthens our financial system or becomes the spark that ignites our next financial crisis.
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